Surgical Innovations Regulatory News (SUN)

24 April 2012

Surgical Innovations Group plc

("SI" or the "Group")

Preliminary Results

Surgical Innovations Group plc (AIM: SUN), the designer and manufacturer of creative solutions for Minimally Invasive Surgery ('MIS'), announces preliminary results for the 12 months ended 31 December 2011, which show continued strong growth in SI branded products and OEM sales, the core MIS business.

Financial highlights

·; Group Revenue increased 7.9% to £7.602m (2010: £7.045m)

·; Core MIS business revenue up 18.5% to £7.532m (2010: £6.358m)

·; Gross margins in core MIS business increased to 47% (2010: 45%)

·; Operating profit increased 11.9% to £1.767m (2010: £1.579m)

·; Operating margins increased to 23% (2010:22%)

·; Pre-tax profit increased 10% to £1.705m (2010: £1.549m)

·; Net cash of £1.775m generated from operating activities

·; Basic earnings per share of 0.44p (2010: 0.48p)

Operational highlights

·; Revenues from SI branded products up 22.7% to £4.725m (2010: £3.852m); driven by flagship Resposable® products

·; Revenues from OEM products up by 12.0% to £2.807m (2010: £2.506m); driven by expanded portfolio of OEM customers

·; Strong sales of Resposable® instruments with consumable pull through expected in 2012

·; Single use consumable products now represent 52% of total MIS sales (2010: 46%)

·; OEM agreement with Advanced Medical Solutions (AMS) for a novel adhesive deployment device

·; Continued major investment in research and development, plant and manufacturing

Commenting on Outlook, Doug Liversidge, Chairman, said: 

"We remain confident about the future growth prospects of the business as our existing SI branded products continue to gain international clinical recognition through our expanding and varied routes to market. We expect to see further growth from new products that are launched throughout the year, as well as through the development of existing and new relationships with OEM customers."

Enquiries:

Chairman's statement

I am pleased to report that we have made good progress throughout the year, especially with our OEM products where customer demand continues to increase. The final quarter of the year was particularly strong and our focus on the development of US opportunities has been reflected in the continued growth of US revenues which is continuing to become more important given the current challenges that exist in European markets.

Our strategy of continuous innovation and product development within laparoscopy coupled with our move into new therapeutic markets, such as hip arthroscopy, ensures that we remain at the forefront of Minimally Invasive Surgery (MIS). It also provides a solid platform from which we have a growing pipeline of new products to be launched, that will drive additional growth in the coming year and beyond.

Results

Revenue for the period was £7.602 million (2010: £7.045 million) and profit before tax increased by 10% to £1.705 million (2010: £1.579 million).

A large part of this growth has arisen from sales of our SI branded products where we saw revenues increase by 22.7% to £4.725 million (2010: £3.852 million). We experienced particularly strong sales in the final quarter of the year and this growth was driven by our flagship Resposable® products. OEM sales for the year increased by 12.0% to £2.807 million (2010: £2.506 million) highlighting the importance of our expanded portfolio of OEM customers. The Industrial business has returned to historic levels with sales of £70,000 (2010: £687,000), following a large order in May 2010.

An important measure of our performance is the growth in sales of our higher margin disposable products. Total sales of single use products increased to £3.981 million (2010: £2.924m) which now represents 52% of total MIS sales (2010: 46%).

Gross profit from our core MIS business (excluding Industrial) increased to 47% (2010: 45%).

Group operating profit increased 11.9% to £1.767 million (2010: £1.579 million) and operating margins increased slightly to 23% (2010: 22%). Retained profit for the period was £1.738 million (2010: £1.788 million) which reflects the reduced tax credit compared with the previous year, resulting in an earnings per share of 0.44p (2010: 0.48p).

Cash flow and investment

During the year the Group generated net cash of £1.775 million from operating activities, enabling the Group to continue its strong investment in product development with capitalised R&D costs of £2.498 million (2010: £1.674 million).

Elsewhere, capital expenditure remained strong with £1.239 million invested in plant and equipment while the total number of employees increased from 78 at the end of 2010 to 121 at the end of 2011.

Dividend

The Board maintains the belief that at this stage in the Group's development it would be more appropriate to continue its focus on strong inward investment and does not intend to pay a dividend for the year ended 31 December 2011.

Acquisitions

The Board continues to review acquisition opportunities in the area of MIS where strong synergies exist with the Group and where our R&D expertise and in-house manufacturing capabilities can enhance functionality and profitability to the products acquired whilst providing cost savings for the end user.

Clinical Advisory Board

The Clinical Advisory Board now consists of nine highly-experienced surgeons covering a wide range of specialisms in MIS, with Mr Marco Adamo and Mr Jon Conroy joining the Board in January 2011, the latter extending the team's expertise into hip arthroscopy, and Mr James Halstead, a specialist in bariatric laparoscopy, and Mr Siôn Glyn-Jones, a Consultant Hip Surgeon, joining after the period end.

Outlook

Trading in the period since the year end has been encouraging and is in line with current expectations for the first quarter. Revenues from our own SI branded products continue to be buoyant and we have received further interest from new OEM customers to develop innovative laparoscopic products on an exclusive basis.

We believe that Surgical Innovations is increasingly being recognised as a world-leading innovator in MIS technology. This is reflected in the increased demand that our Resposable® products are currently experiencing. The R&D team continues to work on generating both a wider range of new products and enhancements to existing product lines. We expect to see a regular flow of these throughout the year which will help to drive future revenues.

We remain confident about the future growth prospects of the business as our existing SI branded products continue to gain international clinical recognition through our expanding and varied routes to market. We expect to see further growth from new products that are launched throughout the year, as well as through the development of existing and new relationships with OEM customers.

I would like to thank the Board and staff for their hard work in 2011 and their undoubted contribution to the growth of the business. We are better positioned than ever to take full advantage of the opportunities that are available to us and I look forward to reporting on the continuing success of the Group over the coming year.

Doug Liversidge CBE

Chairman

24 April 2012

Operating review

Operationally, we divide the Group into three segments:

SI Brand - our own branded minimally invasive devices. These include our port access systems: Yelloport® and YelloPort+plus™; our laparoscopic instrument ranges: Logi® Range, Logic® Reusable, Quick® Range; as well as our retraction systems: FastClamp™ and Pretzel-Flex®.

OEM - original equipment manufacturercontracts with third party medical device companies to supply minimally invasive technology products through either own label or co-branding.

Industrial - provides minimally invasive technology for industrial applications. This remains a non-core element of our business.

SI Brand

Revenues from SI branded products increased over the period by 22.7% to £4.725 million (2010: £3.852 million). This growth was driven by SI's flagship Resposable® products YelloPort+plus™ and Logi®Range as well as a large order in the second half from one of our master distributors to bolster their inventory for distribution across the Far East and Indian Sub Continent.

Strong demand for Resposable® instruments, where some elements are disposable and others reusable, reflects a culture change within the medical device industry and provides cost-effective solutions within an increasingly cost-conscious environment. As our Resposable® products gain traction, we will benefit from the on-going sales of consumables. To give an illustration, unit sales of our YelloPort+plus™ valves and swingtops (the higher margin disposable elements) rose an impressive 48.3% on the previous year, primarily as a result of the commissioning of the cannula units (the reusable element) sold during 2010. Importantly we despatched a total of 5,272 YelloPort+plus™ cannula units in 2011, an increase of 64% on the previous year (2010: 3,213 units) and so we expect consumable revenues to continue to rise in 2012. This "razor / razor blade" model provides us with good visibility for future earnings as well as a demonstration of the scalability of our business.

The SI branded products are sold through a network of specialist laparoscopic distributers across 45 countries under minimum value contracts. We continued to expand this network during the period creating new market opportunities in Saudi Arabia and South Africa, and in July we became the sole supplier of Resposable® laparoscopic ports to Life Group, one of South Africa's largest health insurers.

Our success in targeting the US market was demonstrated in February when we signed a four year exclusive contract with US based Mediflex USA Inc for the inclusion of YelloPort+plus™ in surgical trays in the US, a contract which is valued at a minimum of US $2.2 million over that period. During the year we also signed a five year extension to our agreement with our US Master distributor, SI US, whereby they have committed to a minimum value of sales of our Logi®Range and Logi®Cut product range worth US $8.0 million during that time. We have also received positive news from our Asian Master Distributor, ACP, who is now handling registrations in Singapore, Taiwan and India to allow our products to be launched in these growing markets.

In terms of new products, we launched our advanced laparoscopic retractor, PretzelFlex® in Europe during the final quarter of the year and have already shipped a substantial number of instruments to date. We also launched our 3mm Instrument Range at the end of 2011. This range has been developed in response to the increasing focus on safer surgery and cosmesis (the cosmetic aspect of surgery), where there is a drive for smaller and even less invasive surgery. Initial feedback has been very positive, particularly because the products maintain rigidity despite being a smaller size. Revenues from these new products have had a minimal impact on the 2011 results and we expect them to make a growing contribution from the current year onwards.

OEM

Revenues from OEM increased 12.0% to £2.807m (2010: £2.506m) as a result of our strategy to encourage and expand OEM relationships. Interest from OEM partners often results from the improving clinical awareness and acceptability of the SI Branded products. The two segments complement each other and help stimulate interest and opportunity in our product offerings.

As part of our OEM contracts we license our intellectual property over fixed periods and manufacture the products on their behalf, either as their own label or with co-branding. The contracts include minimum values and volume which provide helpful visibility for future sales, although we still remain reliant on our partners to drive business on our behalf and it can, on occasion, be unpredictable in terms of initial product launches, supply chain inventory requirements and clinical adoption of new device technology.

With all OEM agreements the Group retains the full intellectual property rights for any devices it develops in return for providing exclusive worldwide distribution rights to the OEM customer over a fixed period of time. We do not offer contract manufacturing or a long-term assignment of a licence, with the exception of revenues that are generated from royalties. The ownership of all intellectual property enables the Group to take back distribution rights at the end of any distribution agreement or if sales targets are not met.

An SI branded PretzelFlex® has already been successfully launched in Europe, receiving positive clinical feedback from surgeons and distributors. In the US we intend to sell the PretzelFlex® through an OEM partnership with CareFusion, replacing the existing licensing agreement for the Diamond-Flex® which is due to end in 2012. The PretzelFlex® generated significant interest from US surgeons at the recent SAGES congress (Society of American Gastrointestinal and Endoscopic Surgeons) in San Diego, and having received 510(k) clearance from the US Food and Drug Administration ('FDA') last month this ensures continuous revenue streams in an already established market.

In September we signed an agreement with Advanced Medical Solutions Group plc ('AMS') to develop a novel device for internal application of adhesives and sealants. We believe that together we will have an advantage in the development of glues for use within the laparoscopic field, which is currently served by sutures, staples and tacks. The product is expected to launch in 2013. It will be manufactured by SI, we will retain the intellectual property rights, and AMS will have exclusive worldwide rights to market the device.

Industrial

Total revenues for the Industrial segment during the year were £70,000 (2010: £687,000). As previously stated, the 2010 revenues were flattered by the delivery of a £616,000 order in May 2010 and as predicted, sales for the year have returned to historic levels. Whilst this part of the business is non-core, we continue to seek opportunities where our intellectual property can be adapted to industrial applications and the Group continues to engage with major industrial partners.

Product Development & New Product Pipeline

New product development and product enhancement for the SI Brand continues apace and is driven by the R&D team's close working relationship with the Clinical Advisory Board.

We have continued to invest significantly in new products with a total investment of £2.498m relating to product development (2010: £1.674m). Our aims are to generate a regular flow of innovative products, to work closely with our OEM customers and to widen our reputation with major medical devices companies as an innovative R&D partner.

The Concept and Development teams have been working on a number of new products which will launch under the SI brand during 2012. One product that we will launch in May is the Optical Trocar, part of the YelloPort+plus™ range. The launch has been delayed slightly because of CE mark regulatory issues but approval was finally received early April. The development of the L Hook, a device for electro-surgical cutting, has been given lower priority and so the expected launch has been moved from December 2011 into 2012.

As I mentioned above, we launched our laparoscopic retractor, PretzelFlex®, in Europe during the final quarter of the year. Our teams are already working on developing disposable and Resposable® versions and we expect single use, as well as 3mm designs, to be available before the end of the year.

Development continues on several variants of laparoscopic scissors and handles to support the OEM customer base. We expect to launch all of these devices during 2012. As mentioned above, the team is also developing a device for internal application of adhesives and sealants with AMS and this is expected to be ready for launch in 2013.

An important strategic move for SI is to diversify our product portfolio from Laparoscopy (operations performed in the abdomen using MIS). Our first step in this strategy has been to focus on the hip arthroscopy market. A dedicated team within our R&D department is currently developing our port and flex technology for this rapidly growing market and working closely with our arthroscopy specialists; Mr Siôn Glyn Jones (CAB member since January 2012) and Mr. Jon Conroy, who joined our Clinical Advisory Board last year. Our focus at the moment is to have pre production products available in the third quarter of 2012 and associated revenues from 2013.

We expect to continue our high level of investment in R&D as part of an ongoing strategy to ensure a regular stream of new products and continual product improvement across several areas of surgery, all encompassed within the umbrella of MIS.

Manufacturing

2011 saw us continue our investment in our facilities to ensure the continued growth and optimisation of our manufacturing arm. In the last quarter of the year £877,000, was invested in tooling, plant and machinery out of a total of £1.239m for the full year (2010: £628,000). The new machinery will allow us to increase throughput of YelloPort+plus™ cannula units, multiple reusable jaw styles and manufacture the segment elements for the new PretzelFlex®. With this new machinery now in place we are unlikely to require such significant investment in the current financial year.

We continue to implement cost-down measures throughout the manufacturing process. An example of this is the successful relationship we currently enjoy with both Leeds and Bradford Universities under the Knowledge Transfer Partnership Scheme (KTP). The scheme has focused on the key strategic elements of our business, namely process improvement of the consumable elements within our Resposable® product portfolio.

Post Period End Events

Since the period end we were very pleased to announce the receipt of 510(k) approval for our Logic® Reusable instrument range and for our reusable PretzelFlex® device from the FDA. The approvals will allow these products to be sold in the US. PretzelFlex® will be sold in the US as part of an OEM agreement and the Logic® Reusable instrument range will be sold under the SI brand, which includes our Logic™Handles, which already have approval in the US.

We were also pleased to announce that our US master dealer, SI USA Inc., had been awarded a contract by the Premier Healthcare Alliance ('Premier') for the sale of our Resposable® Logi® Range, Logic® Reusable range of instruments. The contract runs from 1 April 2012 for three years, with the option to extend a further two years upon the agreement of both parties. The deal will provide SI with additional access to hospitals and hospital networks across the US, and replaces previous, but more limited, contracts already held with Premier.

Outlook

We continue to be well placed to drive further growth in the business and to capitalise particularly on the opportunities that are presented to us in the US, which is our largest target market. Our strategy is to continue to focus on product development and to ensure that we have a continuous pipeline of innovative products targeting our existing markets as well as new therapeutic markets all within the MIS field.

We will continue to work with our partners to bring our technology to market, be it through OEM agreements with major medical devices companies, or through our extensive distribution network across the world that promotes our own SI branded products.

I am confident that given we have continued interest from new OEM customers, a strong pipeline of new products, growing traction with our SI branded products and the expected pull through of higher margin consumable sales, we can deliver strong growth in the business and continue to hold a strong position as a world leading innovator in MIS.

Finally, I would like to thank all of our staff and management for their support and hard work over the last year and for helping to make our business the success it is.

Graham Bowland

Chief Executive Officer

24 April 2012

Financial review

Revenue

Revenue increased 7.9% to £7.602 million (2010: £7.045 million). A segmental analysis of revenue is provided below which illustrates the strong growth performance from both SI branded and OEM products. The 2010 Industrial results benefited from a one-off sale in May 2010 of £616,000 and sales have now returned to normal levels.

Gross margin

Gross margin from the core MIS business increased to 47% (2010: 45%). This improvement is as a consequence of increasing MIS product revenues which benefited from a 48% rise in unit sales of YelloPort+plus™ valves and SwingTop® which have relatively higher margins.

Operating expenses

Operating expenses decreased during the period to £1.828 million (2010: £1.932 million) despite further investment in the R&D team and total headcount (excluding non-executive directors) increasing to 121 (2010: 78).

The Group remains comfortable with these staffing levels which ensure it is both able to deliver product on schedule for its customers and continue to invest in future product design and development.

Notwithstanding this investment in personnel, the Group continues to rigorously control costs and is always acutely aware of the need to generate cash to fund future product development.

Finance income and costs

Finance income fluctuates depending on where we hold our bank deposits and for much of the year it was advantageous to hold our cash in a different facility from our debt providers which meant we were unable to offset our debt interest charges with cash interest income.

Finance least costs have also increased in line with the investment in new plant and machinery resulting in an overall increase in net finance expense of £0.06 million (2010: £0.03 million).

We continue to finance assets used in the manufacturing processes of the business as this continues to be a cost effective method of obtaining finance. This also ensures funds remain within the Group for both internal product development and for our working capital needs.

Profitability and operating margins

Operating profit for the year increased to £1.767 million (2010: £1.579 million). We believe this represents a strong signal to our shareholders that we are managing costs well whilst retaining the ability to grow revenues.

We believe further gross margin improvement is possible through product mix, in particular the disposable elements of the YelloPort+plus™ valves and SwingTop®, and through process improvements at our Leeds manufacturing facility.

Capitalised development costs

As in previous years, we have continued our investment in product development across both SI Brand and OEM partner devices. The Board is confident with this investment strategy and, accordingly, £2.498 million (2010: £1.674 million) of costs have been capitalised during the year, increasing the total amount of capitalised costs to £6.482 million (2010: £3.984 million).

The amortisation charge against capitalised costs increased significantly to £550,000 (2010: £184,000) reflecting that products developed in recent years are now launched and selling to customers. No impairments have been identified at 31 December 2011 following review by the Board (2010: £334,000).

Foreign currency

The Group maintains foreign currency bank accounts and, wherever possible, supplier payments are made in Euros or Dollars to utilise currency receipts. The Group has used forward exchange contracts and will continue to monitor the need for such contracts depending upon the level of natural hedging achievable.

Taxation

The Group recognised a tax credit of £33,000 (2010: £239,000) resulting from deferred tax, reflecting the extent to which recoverability of tax losses can be foreseen with reasonable certainty. The Group holds deferred tax assets on the balance sheet of £465,000 (2010: £432,000).

Earnings per share (EPS)

The Group achieved 0.44p (2010: 0.48p) underlying basic EPS in 2011. There were shares issued during the year and full details of all the EPS calculations are set out in note 6 of this preliminary announcement.

Cash, net funds and working capital

At 31 December the group had cash and cash equivalents of £3.183 million (2010: £2.622 million). Net debt, which is defined as cash and cash equivalents less bank overdraft and obligations under finance leases, stood at £1.111 million (2010: net funds of £442,000).

Cash flows generated from operations before working capital movements were strong at £2.827 million (2010: £2.553 million). We have continued to invest in working capital, our manufacturing facility and research and development which reduced cash reserves by £1.245 million (2010: increase of £60,000). The manufacturing facility is now well established and unlikely to require significant investment in the current financial year.

Working capital increased to £4.641 million (2010: £3.942 million) as a result of an increase in inventory (£825,000) associated with the growth of the business and the investment in manufacturing and an increase in trade debtors (£1.143 million) due to the phasing of year-end sales. These increases were offset by an increase in trade and other payables of £1.252 million.

Consolidated statement of comprehensive income

for the year ended 31 December 2011

The Consolidated statement of comprehensive income above relates to continuing operations.

The Group has no recognised gains or losses other than the results for the year as set out above.

Consolidated balance sheet

as at 31 December 2011

Consolidated cash flow statement

for the year ended 31 December 2011

Consolidated statement of changes in equity

for the year ended 31 December 2011

Notes to the financial statements

1. Reporting Entity

Surgical Innovations Group plc ('the Company') is a public limited company incorporated and domiciled in England and Wales (registration number 2298163). The Company's registered address is Clayton Wood House, 6 Clayton Wood Bank, Leeds LS16 6QZ.

The Company's ordinary shares are traded on the AIM market of the London Stock Exchange. The financial statements of the Company for the twelve months ended 31 December 2011 comprise the Company and its subsidiaries (together referred to as the 'Group').

The Group is primarily involved in the design, development and manufacture of devices for use in Minimally Invasive Surgery (MIS) and industrial markets. Surgical devices are targeted at the operating theatre environment in both public and private hospitals. In international markets, the Group sells through independent healthcare distributors, through Original Equipment Manufacture (OEM) and licensing contracts with major suppliers of medical equipment.

2. Basis of Preparation

This preliminary announcement has been prepared in accordance with the accounting policies set out in the annual report for the year ended 31 December 2011 and those to be adopted at 31 December 2011 (see note 3).

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), as adopted for use in the EU, this announcement does not itself contain sufficient information to comply with IFRSs. The Group expects to publish full financial statements that comply with IFRSs in May 2012.

3. Accounting policies

The same accounting policies, presentations and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements. The annual financial statements of Surgical Innovations Group plc are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

4. Publication of non-statutory financial statements

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Sections 434 and 435 of the Companies Act 2006.

The consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated balance sheet at 31 December 2011 and the consolidated cash flow statement have been extracted from the Group's financial statements upon which the auditor's opinion is unqualified and does not include any statement under section 498(2) or 498(3) of the Companies Act 2006. Those financial statements have not yet been delivered to the Registrar.

The audited accounts will be posted to all shareholders in due course and will be available on request by contacting the Company Secretary at the Company's Registered Office.

5. Segmental reporting

Information reported to the board and for the purpose of assessing performance and making investment decisions is organised into three operating segments. The Group's operating segments under IFRS 8 are as follows:

SI Brand- the research, development, manufacture and distribution of SI branded minimally invasive devices.

OEM - the research, development, manufacture and distribution of minimally invasive devices for third party medical device companies through either own label or co-branding.

Industrial - the research, development, manufacture and sale of minimally invasive technology products for industrial application.

The measure of profit or loss for each reportable segment is gross margin.

Assets and working capital are monitored on a Group basis, with no separate disclosure of asset by segment made in the management accounts, and hence no separate asset disclosure is provided here.

The following segmental analysis has been produced to provide a reconciliation between the information used by the key decision maker within the business and the information as it is presented under IFRS.

Included within the segment/operating results are the following significant non-cash items:

Included within the segment/operating results are the following significant non-cash items:

Unallocated expenses include those costs that cannot be split between segments and which are not separately analysed in the management accounts including concept department, sales and marketing, and head office overheads.

Geographical analysis of revenues

Revenues are allocated geographically on the basis of where revenues were received from and not from the ultimate final destination of use.

During 2011, £1,050,000 (14%) of the Group's revenue depended on a single customer in the OEM segment (2010: £1,110,000 (16%)).

6. Earnings per ordinary share

Basic earnings per ordinary share

The calculation of basic earnings per ordinary share for the year ended 31 December 2011 was based upon the profit attributable to ordinary shareholders of £1,704,000 (2010: £1,788,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2011 of 392,716,121 (2010: 375,812,587).

Diluted earnings per ordinary share

The calculation of diluted earnings per ordinary share for the year ended 31 December 2011 was based upon the profit attributable to ordinary shareholders of £1,738,000 (2010: £1,788,000) and a weighted average number of ordinary shares outstanding for the year ended 31 December 2011 of 392,716,121 (2010: 410,691,902). All share options at the financial year end were anti‑dilutive.

7. Share capital

8. Annual General Meeting

The Annual Report will be available from the Company's website, www.sigroupplc.com and posted to shareholders by 16 May 2012 The Annual Report contains notice of the Annual General Meeting of the Company which will be held at 2pm on 19 June 2012 at Clayton Wood House, 6 Clayton Wood Bank, Leeds LS16 6QZ.